The inside bar is one of the most effective yet overlooked price action setups in forex trading. As a consolidation pattern, the inside bar reflects a period of contracted volatility that persists between a bearish or bullish impulse. When the inside bar eventually breaks out, it signals a continuation of the trend in the direction of the breakout.
In this comprehensive guide, we will explore the advantages of trading inside bars, demystify inside bar mechanics and psychology, and break down actionable strategies to profit from these high-probability setups. From optimizing entry and exit points to maximizing risk/reward, you will gain the inside bar price action secrets that can significantly boost your forex trading success.
Why Trade Inside Bars?
Compared to other complex chart patterns, the inside bar keeps analysis simple. There are no subjective interpretations or ambiguous signals – just clean, rule-based trade entries guided by the prevailing trend.
Here are 5 key benefits of trading inside bar breakouts:
- High probability – With predefined entry rules, inside bars have a statistical edge in correctly predicting trend continuation. Win rates can exceed 70% with proper risk management.
- Low risk – Entries are positioned near support/resistance levels with tight stops. This allows small losses and large gains as the breakout accelerates.
- Works on all timeframes – Inside bars form and break out across 1-minute to monthly charts, providing versatility for day traders, swing traders and investors alike.
- Easy to spot – Their rectangular appearance stands out clearly on candlestick charts. No second-guessing – when an inside bar forms, a trading opportunity emerges.
- Market timing – Inside bars mark consolidation after a trend, signaling an opportune time to enter a breakout just as the market gains momentum.
With these advantages, it’s easy to see why inside bars are a favorite among price action traders. Now let’s examine exactly how they work…
Inside Bar Mechanics and Psychology
An inside bar forms one period after a significant bullish or bearish impulse that establishes the trend. It consists of:
- The “mother bar” – The large candlestick that precedes the inside bar and reflects an obvious change in market direction and sentiment. This is your trend bar.
- The “inside bar” – The smaller candlestick bounded entirely within the range of the mother bar. This represents a consolidation as buyers/sellers digest the impulsive move.
Here is a typical inside bar setup:
Inside bars reflect a market in balance before continuation
There are two components that define an inside bar:
1. The high is lower than the mother bar high
2. The low is higher than the mother bar low
It’s critical that both conditions are met, otherwise it’s not a valid setup. The inside bar’s contracted high-to-low range tells us the market is undecided following the initial trend move.
Eventually, either the bulls or bears will gain control as volatility expands once again. This leads to an inside bar breakout.
Inside Bar Breakout
The breakout is triggered when price closes outside the inside bar’s range. This breakout is almost always in the direction of the original mother bar.
A break above the inside bar’s high indicates the uptrend is resuming with continuation buying. A break below the inside bar’s low signals bearish momentum is picking up again through continuation selling.
Pychologically, the breakout confirms the market has finished consolidating and is ready to trend higher or lower. With the inside bar acting as a springboard, the ensuing move is often swift and extensive.
Now let’s switch gears from theory to practice and explore proven trading strategies to profit from inside bar setups…
Powerful Inside Bar Strategies for Forex
Here are 3 high-probability trade setups and step-by-step tactics for successfully trading inside bars:
1. Inside Bar Breakout
This straightforward strategy capitalizes on the momentum unleashed by an inside bar breakout:
- Identify the mother bar that establishes the trend
- Wait for an inside bar to form within the mother’s range
- Place entry order just above the inside bar’s high (for uptrends)
- Or just below the inside bar’s low (for downtrends)
- Set initial stop loss below mother bar low (for longs)
- Or above mother bar high (for shorts)
- Book partial profits at a 1:1 risk/reward ratio
- Trail the remainder to capture extended moves
Inside bar breakout entry, stop loss and profit target
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This approach harnesses breakout momentum in the direction of the larger trend. The fixed stop loss defines risk on the trade while the trailing exit aims to maximize profits as long as the trend persists.
2. Inside Bar Pullback
For lower risk entries, this tactic enters on pullback dips to the mother bar rather than breakout levels:
- Identify the mother bar that starts the trend
- Wait for an inside bar to form
- On breakout of the inside bar, buy the pullback to the mother bar high (for uptrends)
- Or sell the pullback to the mother bar low (for downtrends)
- Set stop loss just outside the inside bar’s range
- Book partial profits at a 1:1 risk/reward ratio
- Trail the remainder to let profits run
Inside bar pullback buys the dip to the mother bar
Instead of chasing the breakout, pullback entries ride retracements back to the mother bar support and resistance. This offers a better risk-to-reward scenario with a closer stop loss.
3. Inside Bars at Market Turning Points
Major market reversals are frequently foreshadowed by inside bars forming on key levels. This presents a high-probability trading opportunity:
- Identify key support or resistance levels in the market
- Look for an inside bar forming directly on the level
- Enter breakout on closing price clearance of the inside bar
- Place protective stop loss on opposite side of key level
- Target overbought/oversold levels for profit taking
Inside bars signal impeding reversals at market turning points
Range extremes, recent swing highs/lows, trendlines and moving averages are examples of suitable levels for this strategy. The presence of an inside bar at a critical area hints a reversal may be brewing.
Now let’s move on to some frequently asked questions about trading inside bars…
Let’s expand on some common questions about inside bar analysis and execution:
What timeframes are best for trading inside bars?
Inside bars form on all timeframes. Lower timeframes like 5-minute and 15-minute charts offer more setups, but 1-hour and 4-hour inside bars see the most momentum. For swing trades, consider daily or weekly charts. Match the timeframe to your trading horizon and style.
What is a good size for an inside bar’s range?
Narrower is generally better, but there are no precise range requirements. The best inside bars contract to less than 30% of the mother bar’s range. This compression reflects tightened volatility and an impending explosive move.
Should I trade every inside bar setup?
No – smart discretion and situational awareness are key. Factor in the surrounding price action context, overbought/oversold conditions, and the larger trend. Inside bars in congestion zones are lower probability.
Where should I set my profit target?
For breakouts, initially target a 1:1 risk/reward ratio, then trail stops to maximize profitable trends. For market reversals, aim for recent swing highs/lows, support/resistance zones, or overbought/oversold levels depending on the new emerging trend.
Is it profitable to fade inside bar breakouts?
Generally no. Trade with the prevailing trend indicated by the inside bar breakout direction, rather than fading or counter-trading it. Most successful inside bar trades target breakout entries or pullback scenarios in the trending direction.
With an understanding of inside bar mechanics and expert tips for trading them, you now have the knowledge to implement these high-probability setups in your forex trading plan.
The Key to Trading Success
While inside bars offer a valuable edge, the real key is integrating them within a structured, disciplined approach that employs good risk management on each trade.
Here are final best practices that will help translate your inside bar strategy into consistent profits:
- Trade with the overall trend – Inside bars show the best profits when aligned with the larger multi-week or monthly trend direction. Do not take counter trend trades.
- Define risk on every trade – Use a stop loss when entering inside bar breakouts and pullbacks to contain potential losses if the setup fails.
- Let profits run – Hold inside bar trades for extended gains by trailing stops instead of exiting the entire position too early.
- Stay patient for high-probability entries – Don’t chase sub-par setups out of boredom. Good trades are rare. Keep waiting for A+ inside bar signals.
- Stick to trading rules – Discipline regarding entry techniques, stop loss placement and risk/reward parameters is vital for trading success. Never override pre-planned guidelines.
With the proper knowledge, risk management, discipline and patience, trading inside bars and other well-defined price action strategies can lead to lasting success in forex and across any liquid market.
Conclusion – Simple, Profitable Forex Strategies
Inside bars represent one of the most effective price action setups due their clarity and trend significance. This guide provided the trading rules and examples to immediately implement high-probability inside bar strategies in forex and amplify profits – whether using breakouts, pullbacks, or reversals at key levels.
By distilling the essence of price dynamics into a simple, rule-based system, inside bars exemplify how less is often more when it comes to active trading. Apply these techniques with proper risk management, and you now have a profitable addition to place in your forex trading toolbox.
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